COST Costco Wholesale Corporation

Costco Wholesale Corporation (COST), one of the leading U.S. warehouse club operators, recently posted sales data for the five-week period ended July 1, 2012. However, sales fell short of analysts’ expectations as unfavorable foreign currency fluctuations remained a drag. Moreover, sales for the month were also marginally impacted by deflation in gasoline prices.

After a 4% increase in May, Costco’s comparable-store sales for June climbed 3%, reflecting comparable sales growth of 3% at its U.S. locations and 2% at its international divisions. In the prior-year period, the company delivered comparable-store sales growth of 14%.

For the 44-week period ended July 1, 2012, the company registered comparable-store sales growth of 7%, with U.S. and international sales also rising by the same percentage.

Excluding the effects of gasoline prices and foreign currency fluctuations, Costco’s comparable-store sales for June climbed 5%, with U.S. and international comparable sales increasing 3% and 8%, respectively. For the 44-week period, the company registered comparable-store sales growth of 6%, with U.S. sales rising 6% and international sales climbing 9%.

Total net sales for June jumped 6% to $9.18 billion from $8.69 billion in the same month last year. For the 44-week period, sales increased 10% to $80.46 billion from $73.44 billion in the same period last year.

Costco continues to be a dominant retail wholesaler based on the breadth and quality of the merchandises it offers. The company’s strategy to sell products at heavily discounted prices has helped it to sustain growth amidst beleaguered economic conditions, as cash-strapped customers continue to reckon Costco as a viable option for low-cost necessities. Having delivered consistent comparable-store sales growth, Costco is well positioned in the warehouse club industry.

A differentiated product range enables Costco to provide an upscale shopping experience to its members, resulting in market share gains and higher sales per square foot. Moreover, the company continues to maintain a healthy membership renewal rate. Costco also remains committed to open new clubs in domestic and international markets. The company’s diversification strategy is a natural hedge against risks that may arise in specific markets.

However, Costco faces stiff competition from Target Corporation (TGT) and Sam’s Club, a division of  Wal-Mart Stores Inc. (WMT), which follows a similar business model that pushes through high volumes of merchandise at low prices in membership-only warehouse clubs. Thus, aggressive pricing to gain market share and drive traffic amid stiff competition may depress sales and margins.       

Costco currently operates 605 warehouses, which include 438 in the United States and Puerto Rico, 82 in Canada, 32 in Mexico, 22 in the United Kingdom, 13 in Japan, 8 in Taiwan, 7 in Korea and 3 in Australia.

Going by the pulse of the economy, we believe that budget-constrained consumers will remain watchful on their spending and look for discounts. Consequently, we could see more competitive pricing, compelling products and innovative ways to attract shoppers.

Currently, we maintain our long-term “Neutral” recommendation on the stock. However, Costco holds a Zacks #3 Rank that translates into a short-term ‘Hold’ rating.

 
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